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Cypen & Cypen
NEWSLETTER
for
October 19, 2017

Stephen H. Cypen, Esq., Editor

1.  SOCIAL SECURITY BENEFITS TO INCREASE IN 2018:  When the Social Security Administration announces the annual cost-of-living adjustment (COLA), there is usually an increase in the Social Security and Supplemental Security Income (SSI) benefit amount people receive each month. Federal benefit rates increase when the cost of living rises, as measured by the Department of Labor’s Consumer Price Index (CPI-W). The CPI-W rises when prices increase, making your cost of living go up. This means prices for goods and services, on average, are a little more expensive. The COLA helps to offset these costs. As a result, more than 66 million Americans will see a 2.0 percent increase in their Social Security and SSI benefits in 2018. Other changes that will happen in January 2018 are based on the increase in the national average wage index. For example, the maximum amount of earnings subject to Social Security payroll tax will increase to $128,700. The earnings limit for workers younger than “full” retirement age will increase to $17,040 and the limit for people turning “full” retirement age in 2018 will increase to $45,360.
 
2.  NASRA ISSUE BRIEF: EMPLOYEE CONTRIBUTIONS TO PUBLIC PENSION PLANS:  Mandatory participation and shared financing for the vast majority of employees of state and local government, both participation in a public pension plan and contributing toward the cost of the pension are mandatory terms of employment, reportswww.nasra.org. Requiring employees to contribute distributes some of the risk of the plan between employers and employees. The primary types of risk in a pension plan pertain to investment, longevity and inflation. Employees who are required to contribute toward the cost of their pension assume a portion of one or more of these risks, depending on the design of the plan. The prevailing model for employees to contribute to their pension plan is for state and local governments to collect contributions as a deduction from employee pay. This amount usually is established as a percentage of an employee’s salary and is collected each pay period. Employee contribution rates to pension benefits typically are between four and eight percent of pay, and are outside these levels for some plans. In some cases, required employee contributions are subject to change depending on the condition of the plan, the fund’s investment performance, or other factors. In some plans, the employee contribution is actually paid by the employer in lieu of a negotiated salary increase or other fiscal offset. Some 25 to 30 percent of employees of state and local government do not participate in Social Security. In most cases, the pension benefit—and required contribution—for those outside of Social Security is greater both than the typical benefit and the required contribution for those who do participate in Social Security. Many states in recent years made changes requiring employees to contribute more toward their retirement benefits: since 2009, more than 35 states increased required employee contribution rates. As a result of these changes, the median contribution rate paid by employees has increased. Employee contributions are a key component of public pension funding policies. The vast majority of employees of state and local government are required to contribute to the cost of their pension benefit, and this number has grown in recent years as most states that previously administered non-contributory plans now require worker contributions. Many employees also are being required to contribute more toward the cost of their retirement benefit. In some cases, this requirement applies to both current and new workers; in other cases, only to new hires. A growing number of states are exposing employee contributions to risk – either by tying the rate directly to the plan’s investment return, or by requiring hybrid or 401k-type plans as a larger component of the employee’s retirement benefit.
 
3.  PUTTING STATE PENSION COSTS IN CONTEXT: HOW THEY COMPARE TO THE COST OF CORPORATE SUBSIDIES, TAX BREAKS & LOOPHOLES:  Although funding levels for public pensions have improved since the Great Recession, strengthening state pension funds remains a high priority in many states, reports Good Jobs First,www.goodjobsfirst.org. While some advocate for reducing benefits or shifting workers to less secure 401(k)-style plans, there are other state expenditures that are often poorly monitored and should be considered as a source of funding to help states meet their promises to public servants. Chief among these are the costs of corporate subsidies and tax breaks which have proliferated in many states. Good Jobs Firstseeks to put current pension costs (known as employer normal costs) into comparative context. Focusing on 12 states where pensions have been debated, we compare those costs to the amount of revenue those states lose each year as the result of economic development subsidies offered to corporations as well as the tax preferences and accounting loopholes (including offshore tax havens) used by companies. While not providing an assessment of the effectiveness of any particular subsidy or provision, this approach does provide an important perspective on public sector pensions. We found that in 9 states, the total annual cost of corporate subsidies, tax breaks and loopholes exceeds the current annual pension costs for their main public pension plans. In some cases the differences are enormous In Florida they are nearly three times pension costs. In four of the twelve states, subsidies and loopholes are more than twice pension costs. In three states, pensions exceed the annual cost of subsidies and tax break/loophole costs, at least as we could identify them. However, Oregon does not disclose the cost of its single sales factor apportionment for corporate income tax, but it clearly generates significant tax savings for firms with significant capacity and payroll in the state but selling most of their goods nationally. Though Alabama issued its first-ever tax expenditure report in early 2017, the cost of five subsidy programs remain undisclosed. In Texas, the lack of a state corporate income tax means there are no corporate income tax credits or exclusions, which are often the largest expense in other states. As a matter of honest accounting and fair budgeting, state leaders should examine all forms of spending before they single out pensions or any other expense. Corporate tax breaks and loopholes are often poorly understood and little-noticed because they do not get debated and annually or bi-annually reauthorized the way appropriations do, nor do they often get sunsetted or audited. But over time, they add up to hundreds of millions, or even billions, of dollars per year.
 
4.  DOWN AND DIRTY WITH “CLEAN” SHARES:  Fiduciary Newsadvises that it looks like regulators and the industry may finally have come around to recognize the difference between fees that matter and fees that should not matter. The word de jour is “clean,” as in “clean shares.” “Clean” shares refer to mutual funds with all the sales-related fees stripped out of them. Unlike other share classes sold through broker/dealers, clean shares are shares that do not have conflicts-of-interests such as charge sales loads, 12b-1 fees, transfer agency fees or other investor expenses that generate commissions for brokers and other intermediaries. Brokers instead can charge commissions or service fees for buying and selling shares. Since these costs are clearly stated on investors’ account statements, clean shares will give investors a far more transparent view of their actual investment expenses. The SEC currently requires some of these conflict-of-interest fees be disclosed on page two or the mutual fund prospectus as either wholly separate fees (i.e., front and back-end loads) or as a separate line item on the expense ratio (i.e., 12b-1 fees). The SEC does not currently require disclosure on other conflict-of-interest fees (i.e., revenue-sharing), and these fees are hidden within the fund’s expense ratio. All fees removed to make funds eligible to be called “clean” shares deal with marketing and distribution payouts, not with normal operating expenses (which are reflected by the fund’s expense ratio). Clean shares are mutual funds that do not have loads or other major fees in buying or selling. The only fee is the typical ‘management fee’ (a small percentage of the mutual funds total assets under management) that all funds use to keep the lights on. Studies have shown that embedded conflict-of-interest fees can have a detrimental impact on mutual fund performance. Researchers have tried to explain this divergence in return data. They believe funds that payout conflict-of-interest fees have built business models based on success through selling, while those fund that do not rely on conflict-of-interest fees have built business models based on success through superior investment performance. By removing conflict-of-interest fees, fund investors receive an immediate benefit from “clean” shares. With fees no longer hidden, it will be easier to monitor fees and competitive pressure will likely eliminate excessive fees. The biggest advantages of ‘clean’ shares are simplicity and lower costs for investors/retirement plan participants and transparency for retirement plan sponsors. Lower costs intensify the effect of compounding and have direct correlation with better investment outcomes for investors and plan participants.
 
5.  JURY AWARDS FORMER SOUTH PASADENA POLICE OFFICER $4.8 MILLION IN DISABILITY DISCRIMINATION CASE:  A Los Angeles jury has awarded $4.8 million to a former South Pasadena police officer who alleged he was fired by the city because of a disability. After a two-week trial, the jury found unanimously in favor of an 18-year veteran who was dismissed from the Police Department in 2013. The veteran police officer’s lawsuit said the reason given for his dismissal, dishonesty, was untrue and that the real reason was discrimination based on his attention-deficit/hyper-active disorder. A former police chief, who retired before the police officer’s dismissal, testified on his behalf, saying he was a good officer, a good man, perhaps the best cop in the department at community policing. The former police chief testified that the city failed the veteran police officer by not providing accommodations to help overcome his difficulty writing reports. Instead, the lawsuit alleged, the replacement chief, endorsed the recommendation of a captain who had long been trying to have the veteran police officer fired.  His termination revolved around a 2012 pre-dawn incident when he failed to cite a motorist he had stopped for speeding. The officer said he let the motorist go when he saw what he thought were silhouettes at the middle school across the street and went to investigate. The next day, the driver went to the police station to report that he may have fled a police officer. Later investigation established that he had been involved in a hit-and-run accident before he was stopped by the officer. The veteran officer said he had not seen the damage on the front of the car. His attorney said his client gave slightly different statements in two interviews. In one, he said he had not gone past the rear bumper of the car. In the other, he said he had not gone past the rear quarter panel. According to the lawyer, the chief claimed the officer was lying about being more concerned over suspicious silhouettes at the school than the driver he pulled over. The jury clearly felt it was obvious disability discrimination. The award was to compensate the officer for lost wages, and the fact that they destroyed his career permanently. They fired him on charges of dishonesty. It is known as the death penalty in law enforcement.
 
6.  DO NOT FALL FOR THESE COMMON RETIREMENT MYTHS: Retirement is something many of us look forward to for decades. But as it draws closer, those feelings of excitement may be replaced by some unexpected anxiety, reports www.cnbc.comHow much will I spend each month? Will I be able to travel? Should I move? Catching a case of the retirement jitters is common. In fact, a recent survey of soon-to-be retirees found only 43 percent felt extremely or very prepared for this big transition. People get nervous as it is a big decision, when to retire. It is wise to be cautious at that time for that reason, one wants to make sure he is prepared. Part of being prepared means doing your research and not making any assumptions, including falling for these common retirement myths. #1: Medicare has you covered--Some older Americans are surprised to learn Medicare parts A and B can leave them with gaping holes in their health coverage. The basic version of this government-run insurance program pays for routine doctor visits and hospitalizations, but that is all. If you want prescription drug coverage you will need to also buy what is known as Part D. Dental care, hearing aids or long-term care insurance also are not covered by any form of Medicare, so for those services you are on your own and will need to buy additional insurance or reach into your nest egg. These big-ticket items are partly why Fidelity estimates a typical 65-year-old couple retiring this year can expect to spend at least $275,000 on medical expenses during their retirement. #2: Your expenses go down--In addition to rising health-care costs, your changing lifestyle may also contribute to a higher rate of spending, even if the house is paid off and the kids are gone. Most financial advisors say you need around 80 percent of your preretirement income to maintain your standard of living. However, if you plan on doing a lot of travel, or buying a second retirement home you may find your expenses actually go up. #3-You will pay less to Uncle Sam--You may no longer be earning a paycheck, but do not forget, money is still coming in the door in the form of pension payments or individual retirement account distributions, both of which are taxable. Many retirees end up paying the same or more in income taxes when they retire. In some cases a portion of your Social Security may also be subject to ordinary income taxes if you meet certain income requirements. Plus, you may have lost some valuable tax breaks such as the mortgage interest deduction if you have recently paid off your home. Keeping these myths in mind as you plan for your next step will help you plan and most importantly retire well.
 
7.  TIPS FOR BUSINESS OWNERS WHO NEED TO RECONSTRUCT RECORDS AFTER A DISASTER:  After a disaster, many business owners might need to reconstruct records to prove a loss. This may be essential for tax purposes, getting federal assistance or insurance reimbursement. Here are four tips for businesses that need to reconstruct their records: To create a list of lost inventories, business owners can get copies of invoices from suppliers. Whenever possible, the invoices should date back at least one calendar year. For information about income, business owners can get copies of last year’s federal, state and local tax returns. These include sales tax reports, payroll tax returns and business licenses from the city or county. These will reflect gross sales for a given period. Owners should check their mobile phone or other cameras for pictures and videos of their building, equipment and inventory. Business owners who do not have photographs or videos can simply sketch an outline of the inside and outside of their location. For example, for the inside of the building, they can draw out where equipment and inventory was located. For the outside of the building, they can map out the locations of items such as shrubs, parking, signs, and awnings.  IRS Tax Tip 2017-56 (October 11, 2017)
 
8.  NEW OFFICE ADDRESS: Please note that Cypen & Cypen has a new office address: Cypen & Cypen, 975 Arthur Godfrey Road, Suite 500, Miami Beach, Florida 33140. All other contact information remains the same.
 
9.  CRAZY STATE LAWS: Good Housekeeping reminds us that there are crazy laws in every state. In South Carolina you cannot play pinball if you are a minor. If temptation gets the best of you, you will be handed a status offense violation.
 
10.  INSPIRATIONAL QUOTE:  We become what we think about. – Earl Nightingale
 
11.  PONDERISMS:  Age is a very high price to pay for maturity.
 
12.  FUNNY TOMBSTONE SAYINGS:  Some tombstones are clever and could make you die from laughter. One tombstone reads: Hey! That is not my name! I am in the wrong grave!
 
13.  TODAY IN HISTORY:  On this day in 1818, the US Government and the Chickasaw Indians sign a treaty.

14. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.

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16. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.

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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.


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